T-154/10: GC backs the Commission in finding “bankruptcy-proofness” as a (new) source of (illegal) State aid

In its Judgment of 20 September 2012 in case T‑154/10 French Republic vs. European Commission, the General Court of the EU (GC) has established a new test of “bankruptcy-proofness” as an advantage contrary to Article 107(1) TFEU that may generate a significant shake up in the control of State aid granted (implicitly) to establishments of an industrial and commercial character (EICC, or EPIC in their French acronym)–ie legal entities governed by public law which have distinct legal personality from the State, financial independence and certain special powers, including the performance of one or more public service tasks.

 In a nutshell, the controversy concerned the Commission’s position that there is (illegal) State aid where the legal form and status of EICCs shield them from general rules on bankruptcy and winding up under the relevant national legislation (in the case, French law). Indeed, in the view of the Commission as summarised by the GC,

 [the EICC concerned (La Poste)] was not subject to the ordinary law rules governing the administration and winding-up of firms in difficulty and that, according to point 1.2, second paragraph, fourth indent of the 2008 Notice [on the application of Articles 87 [EC] and 88 [EC] to State aid in the form of guarantees (OJ 2008 C 155, p. 10)], there is aid in the form of a guarantee where more favourable credit terms are obtained by undertakings whose legal status rules out bankruptcy or other insolvency procedures (T-154/10, at para. 23, emphasis added).

In short, the GC concurred with the Commission and found that, where a given entity is shielded from general bankruptcy procedures, there is an (implicit advantage) that can constitute State aid. Therefore, a new test of bankruptcy-proofness has been instituted by the GC and this may have deep and far-reaching implications in the control of State aid control to EICCs.

However, the detail of the reasoning is worth reading, since there is a number of elements to take into consideration in the analysis whether a given entity is subjected or excluded from the scope of ‘regular’ bankruptcy and winding up procedures. In the reasoning of the GC:

79 The French Republic considers that, contrary to the view put forward by the Commission, the inapplicability of insolvency and bankruptcy procedures under ordinary law […] does not mean that La Poste cannot go bankrupt or find itself in a situation of insolvency. The French Republic observes that specific procedures, which do not give creditors any guarantee that they will recover all of their claims, are applicable to [EICCs] […] the primary objective of which was to regulate situations in which public entities, although solvent, refused to honour certain debts, established a scheme of enforcement remedies, which give the governing body the power to substitute itself for the executive of a publicly-owned establishment so as to release the ‘necessary credits’ – and not State resources – in that establishment’s budget, with a view to satisfying potential creditors. That law, however, confers no authority and even less the obligation on the State, whose role can be compared to that of an ad hoc legal representative, to release State resources for the benefit of potential creditors of publicly-owned establishments. […] Lastly, the existence of the programmes […] allowing advances to be made to organisations distinct from the State that manage public services, do not mean that an implied guarantee mechanism has been established.

80 In that regard, the Court observes that the parties agree that [French bankruptcy law] excluded from its scope all public entities, in particular [EICCs]. Under […] that law […] ‘[r]ecovery and judicial winding-up shall be applicable to all traders, all persons registered in the business directory, all farmers and all legal entities governed by private law’. The corresponding provision in force on the date of adoption of the contested decision provides, in the same vein, that ‘[t]he safeguard procedure shall be applicable to all persons pursuing commercial activities or crafts, all farmers, all other natural persons pursuing independent professional activity, including the liberal professions subject to legislative or regulatory status or whose title is protected, and also to all legal entities governed by private law’. Moreover, it is apparent from the case-law […] that the legislation indicated ‘that property not belonging to private persons shall be administered and alienated according to the specific rules applicable to them; that, in respect of property belonging to public entities, even those pursuing industrial and commercial activities, the principle of non-seizability of that property precludes recourse to private-law enforcement remedies; that only the creditor who has obtained an enforceable favourable judicial decision having acquired the force of res judicata and ordering a public entity to pay, even provisionally, an amount of money, may have enforced the specific rules [applicable].

81 The parties disagree, however, as the inferences to be drawn from the inapplicability of ordinary law rules governing compulsory administration or winding-up to [EICCs] with a view to determining whether there is a State guarantee in favour of La Poste.

82 It should be noted at the outset that […] the Commission took the view that, in order to establish whether there was a guarantee for individual claims, it was appropriate, after examining the national legislation and case-law (see first part of the second plea above), to begin by considering whether, in order to determine whether the procedure followed by a creditor of [the EICC] in order to settle its claim in the event of [the EICC] being in financial difficulty was comparable to that followed by the creditor of an undertaking subject to commercial law. Contrary to the impression the French Republic’s line of argument might give, the Commission’s approach was not aimed at finding that an [EICC], by virtue of the fact that it was subject to the application of ordinary law rules governing compulsory administration or winding-up, could not go bankrupt.

83 In the event, the Commission reached the conclusion that the creditors of [EICCs] were in a more favourable situation than private creditors on the ground that, contrary to what happened under the application of ordinary law rules governing compulsory administration or winding-up, the creditor of a publicly-owned establishment did not run the risk of seeing his claim cancelled because of a judicial winding-up procedure being triggered (see recital 150 of the contested decision).

84 This conclusion is to be endorsed. [French bankruptcy law] provides for a mechanism that is different from that established under ordinary law procedures governing compulsory administration or winding-up. That law and the legislation adopted to give it effect implement a claims recovery procedure which, unlike a winding-up procedure under ordinary law, does not, when triggered, extinguish claims but at the most postpones the payment of them. Thus, the creditors of publicly-owned establishments are necessarily in a more favourable situation than creditors of persons coming within the scope of  [general French bankruptcy law] which, in the event of insufficient assets on the part of the debtor person or entity, may see their claim cancelled.

85 As shown by the description of the procedures applicable to [EICCs] […] in the event of an [EICC] having insufficient assets, the payment of claims will be postponed or the competent governing body will release resources in order to honour the claims. It follows that creditors of publicly-owned establishments are necessarily in a more favourable situation than creditors of persons governed by private law.

86 Moreover, although [French bankruptcy law] does not provide explicitly that the State is bound to release State resources in order to enforce a judicial decision […] the Commission made no error in asserting that, once a defaulting publicly-owned establishment’s own resources have been exhausted, State funds will in all likelihood be used to honour the debts of the publicly-owned establishment debtor.

87 Nor did the Commission make an error of assessment in referring […] to certain financial tasks and programmes with a view to highlighting the existence of State resources which might be used in the event of an [EICC] defaulting and, therefore, an indication of the effectiveness of the implied State guarantee in favour of [EICCs].

88 In the light of the foregoing, the conclusions […] as to the consequences [… of] indicia of the existence of an unlimited State guarantee in favour of [EICCs], must be endorsed. (T-154/10, at paras. 79 to 87, emphasis added).

It will be interesting to see the reaction of Member States to this Judgment of the GC, but it seems difficult to anticipate a general submission of EICCs (whichever the specific legal configuration in any given Member State) to general bankruptcy procedures, or the disregard of the (general) principle of non-seizability of public assests. most likely, the discussion will continue before the CJEU, where the hight of the interests at stake will be easier to measure.